Form CG 21 39: Contractual Liability Limitation
1. What the form is
The CG 21 39, titled Contractual Liability Limitation, is an endorsement to a Commercial General Liability (CGL) policy that significantly modifies the policy's standard contractual liability coverage. Its primary purpose is to limit the scope of contractual liability assumed by the insured that the policy will cover. Essentially, it narrows the definition of an "insured contract" within the CGL policy. Standard CGL policies automatically provide broad contractual liability coverage, allowing insureds to assume liability in various business-related indemnity agreements without needing to submit each contract for review. The CG 21 39 endorsement curtails this automatic "blanket" coverage by typically eliminating coverage for liability assumed in most business-related indemnity agreements, specifically by removing paragraph 'f' from the definition of an "insured contract". This paragraph is the part of the definition that generally covers tort liability assumed in a contract or agreement pertaining to the named insured's business.
2. Classes of business it applies to
This endorsement is not specific to any single industry but is often used by insurers as an underwriting tool, particularly for businesses perceived to have higher contractual risk exposures. It is frequently seen in the construction industry, where contracts often involve complex indemnification clauses. For example, a subcontractor might be required by a general contractor to assume liability for accidents arising from the subcontractor's work. If the subcontractor's CGL policy includes the CG 21 39, coverage for the liability assumed under that specific part of the construction agreement might be excluded, unless it falls under the remaining covered categories of "insured contracts". Other businesses that frequently enter into a wide variety of contracts, or those with less leverage to negotiate contractual terms, might also see this endorsement applied by underwriters seeking to limit their exposure to broad contractual assumptions of liability.
Even with the CG 21 39 endorsement, coverage typically remains for certain types of contracts, often referred to as "incidental contracts" or by the acronym L-E-A-S-E. These generally include:
- A contract for a lease of premises.
- A sidetrack agreement (an agreement between a railroad and a business for the use of a railroad siding).
- An easement or license agreement (except in connection with construction or demolition operations on or near a railroad).
- An obligation required by ordinance to indemnify a municipality (e.g., a business agreeing to hold a city harmless for injuries related to a dumpster placed on public property).
- An elevator maintenance agreement.
It's important to note that the endorsement often specifies that these remaining covered incidental contracts must be in writing.
3. Special considerations
The attachment of CG 21 39 creates significant implications for an insured's coverage. A primary concern is the potential for a serious coverage gap if the insured assumes liability under a contract that no longer falls within the narrowed definition of an "insured contract". For instance, if a business signs a contract agreeing to indemnify another party for that party's negligence (to the extent permitted by law), and that contract isn't one of the specifically preserved types (like a lease of premises), the CG 21 39 could eliminate coverage for that assumed liability. This means the insured would be personally responsible for any damages arising from that contractual obligation.
It is crucial for insureds and their agents to understand that this endorsement significantly reduces the breadth of automatic contractual liability coverage. Businesses that frequently enter into contracts requiring them to indemnify others should carefully review their policies if this endorsement is attached. Relying on an umbrella or excess liability policy to fill this gap may not be a viable solution, as some umbrella policies state that they provide no broader contractual liability coverage than the underlying CGL policy. If the primary CGL has the CG 21 39, the umbrella might offer no coverage for the excluded contractual assumptions either.
State laws regarding indemnity agreements can also interact with this endorsement. Some states have anti-indemnity statutes that may void certain types of hold-harmless agreements, particularly those where one party assumes liability for another's sole negligence. However, these statutes often have exceptions, including for insurance. The CG 21 39 can complicate this, as it removes the very insurance coverage that might have made an indemnity agreement enforceable under such statutes.
4. Key information for agents and underwriters
For Agents:
- Identify Coverage Gaps: When CG 21 39 is present, agents must meticulously review their client's contractual obligations to identify potential uninsured exposures. This involves understanding the types of contracts the client regularly enters into and comparing them against the limited list of "insured contracts" remaining after the endorsement.
- Client Education: It's critical to educate clients about the significant reduction in coverage caused by this endorsement. Many businesses are unaware of its impact until a claim is denied.
- Negotiate Removal or Alternatives: Agents should, if possible, negotiate for the removal of CG 21 39, especially for clients with significant contractual exposures. If removal isn't possible, explore alternatives like the CG 24 26 (Amendment of Insured Contract Definition), which is less restrictive, though it still limits coverage (e.g., to situations where the named insured is at least partially at fault).
- Document Discussions: All discussions with the client regarding the CG 21 39 and its implications should be thoroughly documented.
- Umbrella Policy Coordination: Verify if the client's umbrella policy will provide broader contractual liability coverage or if it will follow form with the restricted CGL.
For Underwriters:
- Risk Assessment: The CG 21 39 is an underwriting tool to manage exposures from an insured's assumption of liability in contracts. It's typically used for risks that present higher-than-average contractual liability hazards.
- Pricing Considerations: The premium should reflect the reduced coverage. However, the application of this endorsement doesn't eliminate all contractual liability exposure, as the "incidental contracts" remain covered.
- Clarity in Communication: Ensure the restrictive nature of this endorsement is clearly communicated to the agent and, through them, to the insured.
- Alternative Endorsements: Be aware of and consider when alternative endorsements, such as CG 24 26, might be more appropriate to balance risk management with the insured's legitimate coverage needs.
- Impact on Additional Insureds: The CG 21 39 can impact coverage for additional insureds, as their protection might rely on the scope of the named insured's contractual liability coverage. If the named insured's policy is endorsed with CG 21 39, an additional insured might not receive the expected protection if the underlying contract is no longer considered an "insured contract."